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Useable vs Rentable Square Feet


Being able to make sense of usable vs rentable square feet is vital for knowing how much space you are really going to get when you rent an office for your company. Knowing the difference between usable square feet and rentable square feet can mean all the difference in evaluating the best deal on a commercial lease. Office space is generally listed with a rentable square footage rate, which includes more square feet than the actual space the tenant will occupy. Having this knowledge will also help you ensure that you are getting the best possible deal on an office space and that you have an accurate idea of how much space you will be getting.





Let’s talk about useable square feet.  The usable square feet of a space is defined as the total area unique to the tenant. Think of it as the space specifically set aside for your company’s use. Once you walk into your suite, the area inside is considered usable square feet.  The calculation of this number will be slightly different for tenants leasing a full floor vs tenants leasing a partial floor. For a partial floor lease, this includes all office space plus any storage areas or private restrooms unique to your suite. It also includes space taken up by things like columns or recessed entries.


Rentable square feet.  Let’s talk about it.  So what is rentable square feet?  A commercial office building is not made up of private offices and cubicles alone. Corridors, meeting spaces, lobbies, stairways, restrooms and so on are used by all building tenants, and landlords charge for the use of this space as well. Rentable office space includes the usable square feet of the office space plus a pro-rata share of building common areas. Pro-rata means that tenants pay for these common areas in proportion to the amount of space they lease in the building.


recessed entry



So how do you calculate the rentable square feet? To calculate rentable square feet, landlords use what is called a load factor (also called a common area factor, or an add-on factor).  They use the load factor to figure rentable square feet for individual tenants. This number is based on the percentage of common areas found in the building. If a building has a total square footage of 100,000, with 85,000 usable square feet.  This would leave 15,000 square feet of common areas and the load factor would equal to the rentable square feet divided by the usable square feet, or 1.15.


The formula for calculating load factor goes just like this:

Building Rentable Square Feet ÷ Building Usable Square Feet = Load Factor

So that would be, in this example,:  100,000 ÷ 85,000 = 1.15


This load factor is then multiplied by the individual tenants’ usable square feet to come up with the total rentable square feet. If a company desired to lease 5,000 usable square feet, for example, this number would be multiplied by the load factor of 1.15 to reach the number of rentable square feet:


The formula is as follows:

Tenant Usable Square Feet x Load Factor = Tenant Rentable Square Feet

5,000 usable square feet x 1.15 = 5,750 rentable square feet.


The rentable square foot amount would then be multiplied by a rental rate to come up with the company’s total annual or monthly rent.


office 2


Knowing this formula helps companies to evaluate their best deal for office space. Suppose a company compared two 5,000 usable square foot office spaces with the same rental rate from two buildings with load factors of 1.15 and 1.20.


5,000 usable square feet x 1.15 = 5,750 rentable square feet

5,000 usable square feet x 1.20 = 6,000 rentable square feet



In the first building, the rent would be based on 5,750 square feet, whereas the second building would charge rent based on 6,000 square feet. The building with the lower load factor would save the company significant money.

On the other hand, the company may decide that the extra money is worth the larger, fancier lobby, or more spacious kitchenette. It could be the company’s best decision to value the amenities more than the extra cash. The important thing is for companies to do a little math and figure out exactly what they are paying for in order to make intelligent decisions about value.



Load factors, often represented as a percentage, commonly range between 10% and 20%. Often a partial-floor tenant will pay a floor common area share as well, in order to pay for use of the floor’s corridors and bathrooms, etc. The landlord will calculate the tenants usable square feet times the proportion of space the tenant occupies on the floor to come up with a floor rentable square feet figure; that number is then also multiplied by the building’s load factor.

Now you have a little extra insight into commercial real estate and how those square footage figures you see in office space listings are actually calculated. Ideally, when you are looking for a new office, you will be working with a commercial real estate broker who will be able to walk you through issues like this, but it is always smart to be informed and aware. Also note that if you see the abbreviation USF, that stands for usable square feet, and the abbreviation RSF stands for rentable square feet.

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Crash Course – Commercial Real Estate 101


“What is commercial real estate?”


Commercial real estate is an industry that is not necessarily widely known and promoted.  Because of that, when some people hear the term real estate, they automatically think of a residential property.  Most likely, the reason for this is because much of the population has either directly or indirectly experienced facets of the home-buying experience.  On the surface, they may seem similar, but there are many, many differences between commercial real estate and residential real estate.  Let’s talk about some of them.  Welcome to your crash course – Commercial Real Estate 101.


“The main difference is…”

A property that provides a living space is considered residential real estate.  On the flip side, a property that is exclusively used for business-related purposes with the intention of generating income, is considered commercial real estate.  Commercial real estate is segmented into different niches to include retail, industrial, land, multi-family, mixed-use developments, and office.  The performance of commercial property, including sales prices and new building rates, are often used as a measure for business activity in a given market or submarket. 



“What is retail real estate?”

Retail properties are used to market and sell consumer goods and services. They range from shopping centers to individual stores and pop-up shops to big box stores like Saks Fifth Avenue and JCPenney.



“What is industrial real estate?”

An industrial property is a property that is used for the actual manufacturing of something.  It can either be considered a factory or plant.  These building types are usually zoned for light, medium, or heavy industrial.  This includes uses such as warehouses, garages, and distribution centers.


“What is land real estate?”

Land is real estate property, less buildings and equipment, which is designated by fixed, spatial boundaries.  Land ownership might offer the titleholder the right to any natural resources that exist within the boundaries of their land. 



“What is multi-family real estate?”

A multi-family property is any residential property that contains more than one housing unit to include duplexes, townhomes, apartment buildings, and condominiums.  These are some of the most common examples. 


“What is mixed-use real estate?”

Mixed-use properties or developments combine residential and non-residential buildings.  They can be a single building, multiple buildings, or an entire neighborhood.  Mixed-use developments provide ample access to community amenities and foster community involvement.  



“What is office real estate?”

Lastly, we have office real estate, which is what I focus on.  Office properties are occupied for a variety of different purposes.  Office users can engage in retail enterprises, services businesses, non-profit organizations, technology firms, etc.  Office can refer to entire buildings, a floor, parts of a floor, or office parks such as Concourse Office Park in Atlanta, GA featuring the King and Queen towers.  Office buildings are categorized by their height.


“How is a building defined by its height?”

An office building has less than 7 stories above ground level is classified as a low-rise building.  An office building that has between 7 and 25 stories above ground level, is classified as a low-rise building.  An office building that has more than 25 stories ground-level building, is classified as a high-rise building.  Office buildings are further categorized by class.



“What is building class?”


Class A – Building classes range from A to C and are determined based upon the physical and locational aspects of building.  Class A properties tend to accommodate users who need high-quality finishes and materials to attract a specific employee or customer.  The building is normally located close to amenities and prestigious areas.

Class B – With class B properties, they tend to be more functional and probably will be highly efficient.  They will be nice but cost-effect and sometimes building age considered when classifying a building.  If the building has high-quality finishes but the design is kind of dated, the building could be considered a Class B.

Class C – Class C Properties have physical, functional, and economic obsolescence.  They tend to be in less desirable areas they may not look very pretty, however, they normally have lower risk and can accommodate start-ups that need lower occupancy costs. 



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What Can a Tenant Representation Broker Do For Me?

Got Difficulties?  No problem.


If you are seeking commercial office space to lease for your business, hiring a skilled tenant representation broker is the way to go.  With a tenant representation broker, you will find that many of the difficulties associated with finding commercial space will be alleviated.   A good tenant rep broker will find you the office space that meets your companies needs while paying attention to your bottom line.  Read on to find out what a tenant representative can do for you:


#1  Offer Industry Insight

During the search or the negotiation process, you might have some questions to ask about choosing the ideal office space and what makes the most sense for you.  A tenant representation broker will enlighten you on areas where you hold leverage as well as areas where the landlord may not budge on negotiations.  This knowledge comes from handing several transactions in your respective market.


#2  Help You Establish Your Needs


With some experience in the bag, tenant representatives know the right questions to define what kind of office space will be ideal for your company. After a meeting with your tenant rep broker, you may find that your primary idea of a perfect office might not be the best fit for your company after all.


#3 Explain Your Market


It is challenging to determine whether you’re getting a fair deal from a landlord if you don’t have an accurate understanding of the market. A tenant rep broker can provide you with data to help you see how an offer measures up against current market rates in the area.


#4  Tell You About Pocket Listings


Many office spaces are not advertised to the general public. Landlords need tenants so they tend to have good relationships with tenant reps.  This direct connection to the landlord can help you gain access to places that you may not have considered or had access to on your own.  Experienced tenant brokers are familiar with the tenants in the buildings located in their sub-markets and know those who are not renewing their leases.  This insider knowledge could afford you the option to snag a great and sought-after space.


#5  Have the Right Connections


A lot of tenant rep brokers have existing relationships with space planners, interior designers, and real estate attorneys and can help you with referrals for capable professionals whose services you may need in the future.  If you have a good tenant rep, they may help you manage some level of the build-out stage.


#6  Help You Win Leverage


When you have a tenant representative beside you on the table, you’ll have an extra advantage during the negotiation process. The tenant rep broker will argue in favor of your company and help you engage the prospective landlord. They will make sure you get favorable concessions and make sure all business terms are correct in the final lease draft.  A broker can also point to you the right time to agree or when it would be better to walk away from a deal.


#7 Help You Read the Fine Print


Commercial leases are very complicated, long documents, filled with things you might not understand properly. Lease drafts tend to be very landlord-centric and, sometimes, can be outright ridiculous.  On your own, you may not understand this fact but a tenant rep broker can read the fine print and see clauses that could be problematic in the future.  In addition, they can explain in simple terms what the lease agreement entails before you sign the agreement preventing you from making a poor business decision that could affect you for years.


#8 Not Charge You A Penny


The tenant representative’s fee is taken care of by the landlord, not your company. Because of this, you can enjoy all the benefits of having one on your team during the search and negotiation process without altering your budget.  It’s a win-win for you!


#9 Security

In conclusion, having tenant representation is truly essential in securing good office space for your business. It also will create security in lease negotiations.  The tenant representative helps you identify hidden opportunities in the market and make your search easier.  With all of this said, doesn’t it make sense to hire a tenant rep broker?  What do you have lose?  A lot if you go about your commercial real estate search without representation.


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Renewing Your Lease? Consider This First!

Need to Renew?


Renewing a lease can be a pretty overwhelming and complex situation for corporate tenants who are accustomed to simply doing their job and not worrying about real estate.  While that’s tough, it’s also a way to learn what the current market is doing and how the current position of your business can determine whether you can negotiate better lease terms moving forward.

When you truly understand your options during a lease renewal negotiation, you can be a force to be reckoned with.  A tenant representation broker will arm you with market knowledge that you may not otherwise be privy to, help you to negotiate a lower rate, acquire additional amenities, and secure  the best deal possible for your business.

Read on to find out more way you can ensure a good deal for your business as well as how you can protect your future commercial real estate ventures.


Negotiate Early…It Only Makes Sense


When considering a commercial real estate lease renewal, it is always best to be proactive. Evaluate your situation, determine what is and is not working for your business, and communicate with your landlord 9-12 months before your lease agreement expires. Your landlord will consider these points while reviewing your renewal and will be well aware that time is on your side – time for you to look for a new space if your concerns are not fairly considered.

In the event that you don’t have time, I’ve got you covered.  What I just described is the best-case scenario, however, I have closed Class A office space deals within the span of a business week so I know it can be done.  If you have a tenant representation broker who is “Johhny on the spot” and is as “quick as lightning”, then you’ve got a great teammate fighting for you.  That kind of broker will alert the landlord upfront that “time is of the essence” and the deal needs to close fast.  If the landlord is on board, you’ve got a great situation in front of you and even greater representation behind you.


What’s Going On With Your Current Space?


Before making any sudden decisions, take the time to analyze how your business is performing in its current commercial space. This is an opportunity to determine if the space is still suitable for your company and its future growth. Items to consider are location, amenities for employees, office configurations, and tech-enabled infrastructure. These can all serve as discussion points in the negotiation of your renewal. There is a possibility that your current landlord may incur these costs if it means keeping your company as a tenant.  When you determine these factors, you can really increase your market knowledge which will facilitate an opportunity for you to have more leverage in negotiation.


Understand the Market Conditions


The commercial real estate market is dynamic, resulting in continuous changes year after year. It is important to be up-to-date on the current state of the market when looking to sign a new commercial lease or renew your current lease. Look at the market around you; are the rents similar to what you are currently paying for space? Are there other properties that offer additional benefits? Having this knowledge gives you the ability to be well informed while negotiating your current lease. If there is the potential to have some of these added benefits, lease renewal is the time to present them to your landlord.

Once you are more knowledgeable about the current market conditions, ask your tenant representative to negotiate an option or two for you.  The market changes every year so it would best serve you to lock in a good rate for as long as you can.  If it costs too many dollars for the same thing you had last year, it doesn’t make sense.  Don’t you agree?


Research Alternative Options


Even if you are comfortable in your current commercial space, it is always beneficial to educate yourself on other buildings and owners in the market. You may determine an opportunity that is a better fit for your company. Availabilities, rental rates, and amenities have probably changed since you were last in the market, so it is worth the time to look at your options. During your research, you will become more knowledgeable about the commercial real estate market. Whether you stay in your current space or sign another commercial lease, this information can benefit your negotiation process.


Work with a Commercial Real Estate Broker to Negotiate


Do not underestimate the importance of using a broker to help you negotiate your commercial real estate lease renewals. In addition to sharing their market expertise, tenant representation brokers are always aware of the current market conditions, opportunities, owners, and other brokers. They provide you with leverage to get the incentives that you and your business deserve and have a genuine interest in seeing you win.  Tenant reps know how important the right office space is for your business. An experienced broker can add value to your commercial lease renewal process, negotiate any required terms, and answer any lease related questions.

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Looking to Move Your Office? Leave it to the Professionals


You are a successful business owner and everything is booming in your world. 

Your current location has been good to you but your client base has grown dramatically.  The past few years have afforded you a great proof of concept but you know you could offer your clients more.  You know you need a new atmosphere and better location to best serve your clients.  Where do you start?  How do you accomplish that?

It sounds like you a need a tenant representation broker.  A broker will find you a great new space and negotiate you a killer deal.  That sounds simple enough, right?  Let’s delve in a little deeper.  Read on for your “no-cost-to-YOU” solution for getting a better space.


#1: YOU are the first priority


A tenant rep will have great relationships with many landlords and listing brokers.  As a result, this will lead to a smooth transaction for you.  Tenant representation brokers work on your behalf.  They have no obligation to landlords or the buildings they present. It is their legal, fiduciary responsibility to you to evaluate buildings, locations, and leases without any bias.  Additionally, they will not promote one building over another. Tenant representatives will work to position your deal in the marketplace.  They will also leverage the best possible transaction both qualitatively and quantitatively.  They will help your bottom line.



#2: Evaluating commercial real estate is a full-time career


In order to accurately identify lease opportunities, significant time and work goes into the process.  This is time that you, like many professionals, don’t have to spare. Tenant representation brokers will determine your unique office needs and engage the market.  They will analyze all alternatives and negotiate terms.  Ultimately, they will find you an office space that meets your business needs. This process will ensure that you make the proper real estate decisions while paying attention to your operations.


#3: We focus on what we know so you can focus on what you do


Rather than taking time to educate yourself on the commercial real estate market, a tenant representation broker will do that for you.  They can manage everything from needs assessments, parking requirements, zoning restrictions, and as well as establishing timelines and the lease execution. The decisions you make now will impact the efficiency, productivity, and profit of your organization.  A tenant representation broker is sensitive to that.

#4: Tenant reps help you to determine what’s best


Defining and analyzing your business objectives will help you determine what you need in your office space.  A tenant representative will apply consideration to your budget and future growth. Do your projections include expansion?  Do your employees need to be near public transit?  Do you need all offices on glass?  Is walkability a major factor for your business model?  A tenant representation broker will know all of the right questions to ask.  This will help to determine the right commercial space for you.


#5: Tenant representatives have numerous resources…seriously


Searching for new space on your own can be frustrating. It is difficult to get an accurate idea of what’s available in the commercial real estate market.  Many websites that have out-of-date or incomplete information.  It may even be hard to get a listing broker to call you back!   A tenant representative will have the most inclusive list of commercial real estate options in the market. Tenant reps have access to exclusive commercial real estate databases, industry relationships and knowledge of off-market options.  This enables tenant reps to give you a variety of quality options that may not be possible to acquire on your own.  If you don’t believe me, try calling a few numbers on the “For Lease” signs and see how things go.  You’ll see that I’m right!


#6: Tenant Representatives will handle negotiations


Going through the negotiation process can be overwhelming.  Having a tenant representative who knows the market and is exclusively representing your interests is important. They understand the need to capitalize on timing and market conditions.  They will apply negotiation techniques to create the most leverage on your behalf. This will help you receive the best lease terms possible without the stress of negotiating alone.  Lastly, they know the tricks of the trade which will help you.

For instance, if the market price for milk is $3.06 per gallon, you will pay $3.06 for that gallon of milk from the grocery store.  If you are a vendor, you could go directly to that distributor and negotiate a much lower price point.  As a vendor, you have more negotiation power.  Distributors deal with vendors.  HMOs deal with doctors.  Landlords deal with tenant representation brokers.  It’s as simple as that.  Landlords will always negotiate with tenant representation brokers on your behalf.  They do so because they trust the tenant rep to qualify their client before bringing them to the space.  This saves the landlord a time by not having to qualify the prospective tenant upfront.

Tenant representatives can get you a ton of other incentives.  Some include free rent and a break on the rental rate.  They may even be able to get you more concessions!


How Much Is It Going to Cost Me?

On a final note, remember when I said you can get your space at no cost to you?  Let me clarify!  Tenant representation services are free because the landlord pays your representation for you.  I know that sounds super crazy but that IS how this crazy thing works.  The landlord sets aside a budget for representation when he/she acquires a commercial property.  Whatever that budget is, is typically split down the middle.  Half goes to the landlord’s representation and the other half goes to the tenant’s representation.

Why would a landlord do such a thing, you ask?  A landlord is willing to pay a tenant rep’s commission because he/she feels confident that they are bringing a viable tenant to their establishment.  They are willing to pay for that.  I know it’s weird and I don’t make the rules…I just play by them.  If you are looking for office space, I’m more than happy to point you in the right direction.  I hope you found this helpful!

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Commercial Real Estate Conflict – A Real Hurdle for Consideration


Resist the Urge


You are driving in your car and you see a  “For Lease” sign on the building. You happen to be in the market for space and you want to call for more information.  Logically, that makes the most sense, however, the phone number you see is for the building owner’s representation.  If you do not have your own representation, the situation can quickly become unfavorable for you.  You are one of the lucky ones if you DO know you are dealing with the competition but, unfortunately, many business owners aren’t even aware of the conflict in the first place.  They simply see a desirable building and call the number none the wiser.  Resist the urge to call the number on the “For Lease” sign.  Instead, take down the number and the broker’s information and give it to you tenant representation broker.


This is when the tenant representative rides in on the white horse and forsakes all landlord allegiances to represent only the tenant in commercial real estate transaction. Tenant representation has taken root in corporate America, where space users seek out tenant-only brokers and tenant-only brokerage firms have grown in response to this demand.


Get Exclusive


Tenant representation brokers are commercial real estate brokers who work exclusively for the tenant and never represent the landlord.  The tenant representative role developed in response to the conflicts of interest that were, and still sometimes are, rife in the industry. They are now a universally embraced, specialized sector of commercial brokerage, with a broader range of services focused on the unique needs of a tenant such as space planning, construction management, lease renewal consulting, site search, financial analysis and strategic negotiations.


Risk of Conflict


There is a very real risk of working with a broker who has blatant conflicts of interest.  It is in your best interest to be intentional when searching for a broker who only focuses on tenant representation.  In the old model, the landlords and their brokers held all the cards. The tenants were merely a means to an end. With the advent of tenant representation, the industry is waking up to the reality that the tenants actually hold all the cards, because the tenants pay the rent. In truth, landlords are utterly dependent on the rent tenants pay as their sole source of income.  Unfortunately, many tenants don’t realize they hold all the cards and have all of the power.  A good tenant representation broker will enlighten you on the leverage you actually do have.

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CRE Technology is Important…Seriously

Got Tech?


The implementation and advancement of technology is spreading like wildfire across many industries.  Commercial real estate is right in line with the craze.  There are so many new and exciting technologies popping up all over the place.  This is giving tenants more power over their commercial real estate search.  Technology is majorly affecting how tenants search for office space as well as their commercial real estate portfolio management.


Is Your Broker a Techie?


If you are working with a technologically savvy tenant representation broker, you could have a serious advantage.  Today’s technology avenues can afford you the option to research properties as well as the property owners online.  A broker can educate yourself on what the market is doing in terms of average rental rates.  They can also determine what areas are the most walkable, which buildings have the most amenities, as well as where your closest competition lives.


It’s a Full Time Job


Finding the perfect office space is a time-consuming venture.  With access to advanced technology, your tenant representative may be able to present you with virtual walk-throughs.  They can also give you floor plans that you can manipulate to your specifications.  Additionally, drone footage can give tenants the ability to explore the exterior of a building and neighborhood without ever walking away from the computer.  This is especially helpful for out of town or international clients.


Save Me Money


Once you have found the perfect office to lease, technology can make your ongoing expenses more affordable. Smart technologies including SMART thermostats can provide tighter control over energy expenditures.  Advances in telecommunications make it easier for employees to work from home.  This can reduce your square footprint and bottom line.  Businesses can take advantage of highly efficient LED lighting fixtures which can further conserve energy. Lastly, many buildings in your central business district are LEED certified offering energy efficiency throughout the entire premises.


Get Organized


If your company has a portfolio of leases, technologies such as commercial real estate databases and CRM’s can easily help keep things organized and accessible.  The utilization of cloud severs, document management, and video conferencing software can aid to facilitate virtual meetings with your tenant rep broker, attorney, and if needed, the landlord.  You can also share lease drafts and other documents using these technologies in a streamlined, efficient, and effective way.

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Why Should I Hire My Broker Exclusively?

Georgia Real Estate Law requires a tenant to have a statement in writing of their desire to hire a broker to represent them.

If you are a tenant looking for commercial space on your own, you have probably been speaking to the leasing agent who is the broker (or leasing agent) for the seller. The seller’s agent cannot offer any advice or guidance to the tenant and is not obligated to keep any information confidential. If you engage a tenant rep broker, you are stating that he/she legally represents you. This ensures there is no confusion about whom represents whom. This representation includes investigation and negotiation of the commercial property and the neighborhood that you choose, as well as the process for getting you the best deal.

Tenant representation is free to you. The seller pays the tenant rep broker to bring a tenant to them.  Typically, landlords have built in commissions for tenant representatives as well as for landlord representation.  If you opt to not engage a tenant rep broker to represent you, the entire budgeted commission goes to the leasing agent negotiating against you. The leasing agent does not care about your well-being and doesn’t have your best interest at heart. You will be required to sign a Letter of Authorization (LOA) which allows the tenant rep broker to work exclusively for you to find the best commercial space for your business.  It’s a simple agreement that can be negated with a one line email stating, “I no longer need your representation.” Then you are free to engage a different broker or find the space on your own if you so desire.

Often clients have difficulty articulating exactly what they want for their business.

You may start out by telling your broker exactly what type of space you are looking for but your preferences may actually change as you go around viewing different spaces. As a broker, I listen and watch the reaction each client has to every space I show him/her. I have learned to pay attention to the visceral reactions a client exhibits when viewing a property for the first time. This allows me to get a better sense of what they really want and, from there, I can narrow down the search. Going from broker to broker will not allow you to form this type of beneficial relationship which is the glue that holds good brokerage and good decision making together. Remember, your broker is going to work hard for you because he/she is never paid until you are happily in your new commercial space.  Getting your deal closed is a mutual goal.

Your tenant rep broker will also be able to identify any potential timeline issues by communicating to the leasing agent at the start of the transaction.  Some issues may include a committee approval which most business owners may not be aware of.  On occasion, the landlord will hire a large leasing agency to represent their interests.  The leasing agency may have a board or committee who must come together to vote on final lease structures which could cause a delay due to the number of parties involved.  That is just one unforeseen roadblock an exclusive tenant rep broker can prepare you for but your broker will be aware of many more potential pitfalls.

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Is A Personal Guarantee for Me?

When entering into a commercial lease, the Landlord often requires a personal guarantee

from the business owner, even if they have formed a corporation or LLC, and may refuse to rent the space without one.  This means that the guarantors will make the lease and other payments if the business fails. Landlords often ask for a personal guarantee from start-ups and other small businesses.  Read very carefully the language about personal guarantees and how long they last and what happens if the business fails and can’t fulfill the remaining payments on the lease.

You may wonder why a landlord wants a personal guarantee.  When landlords have to pay for a large amount of tenant improvements (i.e. constructing the space to your specifications), personal guarantees are usually required.  If you are a small business with plans to grow or are unsure of the future, limit your personal exposure.  Designing the perfect office space shouldn’t be your highest priority.  Find practical space with a reputable landlord.

Statistics show that only 50% of all new small business start-ups will be operating in 5 years. 

If your landlord requires a personal guarantee, negotiate to limit the term of the guarantee or best yet, find a landlord who doesn’t require one, or find a really good broker who can present you to the landlord in a way that makes them feel as if you would be an amazing new, money-making asset to their center.

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What is a Build-to-Suit and is it Right for You?

What is a Build-to-Suit and is it Right for You

Are you having a hard time finding suitable office space in your market?

Is your office space market so tight that only small blocks of space are available? Do you have a unique or specialized need, which no building currently in your market can accommodate?  Does any portion of your business represent a long term commitment?   If any of the above questions reflects your situation, consider designing and building your next facility to suit your needs rather than renewing your current lease or taking an “as is” building available in your area.

For the first time in over a decade, many corporations are inquiring into the feasibility of a build-to-suit facility for their company.  With office vacancy rates in the single digits, quality office space becoming scarce, and the spread in rental rates between existing space and new space narrowing,  the build-to-suit option appears very attractive.  The market surge throughout many real estate markets in the U.S., has driven vacancy rates down, rents up, and made landlords jubilant.  Economists predict a drastic under supply of office space in many areas, yet lenders and developers are reluctant to construct new buildings – unless a substantial portion of their risk is eliminated.

A build-to-suit (or design-build) lease is essentially a landlord/developer’s agreement to construct a purpose built building, usually for a single tenant.

The landlord will typically own or ground lease the lands (and once constructed, the building) and has the option of re-letting the building to a new tenant upon the expiry of the term of the build-to-suit lease to the original tenant. Build-to-suit leases typically are for a longer term than a normal lease in order to permit the landlord to recoup its investment over the duration of the lease term.

The user assumes the responsibility of acquiring the land; hires a general contractor to oversee the planning and construction; and assumes the liability of financing, either with debt or equity.  Upon completion, the user has the option to continue ownership or sell the property to an investor and lease it back.  This is known as a sale-leaseback transaction.

A build-to-suit arrangement is essentially comprised of two agreements: (i) a development or construction agreement, the result of a request for proposal (“RFP”) process, which defines the relationship between the landlord and tenant from the design through to the construction of the building; and (ii) a lease agreement, which stipulates the terms of the occupancy post-construction. In some cases, the provisions regarding the construction of the building are included in the lease itself or captured in an accompanying “work letter”. The construction aspect of this arrangement is usually the key issue and the most complicated, warranting close attention to the landlord’s and the tenant’s responsibilities in this regard.

Given the interplay of traditional lease issues with design, construction, timing and financing concerns associated with making a project a reality, build-to-suit leases present a unique set of obstacles that parties must face and which require careful drafting and attention. 

Before determining the structure of a build-to-suit, the user must analyze the pre-tax, after-tax and profit/loss impact of the various alternatives.  Many factors influence the financial impact of a build-to-suit.  Each factor must be sufficiently examined for the optimal structure to be achieved.  Below is an abbreviated list of key factors:

Initially, most build-to-suit opportunities were with users whose credit was classified as investment grade which typically falls in the Standard and Poors classification as BBB and above.  However in today’s market, financing is available for tenants rated slightly below investment grade (BB, B).  Obviously, the stronger the credit rating of the company, the more favorable rental rate a company can obtain due to the reduced risk assumed by the investor and lender.

A build-to-suit lease has the potential to bind the landlord and tenant for an extended period of time and the design-build process is typically a lengthy process requiring significant commitments of capital, time and effort by each of the parties at the outset. Accordingly, the question as to the exact role each party will play warrants more than a superficial evaluation. A landlord will need to carefully evaluate the credit-worthiness of the tenant and be cognizant of the nature of the tenant’s business and its specific needs to help guide the design and construction of the building. Quite often such analysis will result in the landlord requiring a parent guarantee and/or cash security for the tenant’s obligations under the build-to-suit agreements. From a tenant’s perspective (and as part of the RFP response process), it should assess whether the landlord has the expertise and financial wherewithal to deliver the building within the required time period and as specified. Much of this will be contingent upon evaluating the landlord’s previous build-to-suit experience, local and industry reputation and organizational structure. In some cases (where, for instance, there is a significant tenant improvement allowance payable by the landlord or where the landlord is a special purpose entity), it may be appropriate for the tenant to require the guarantee of a parent entity, the securitization of an amount owing via a letter of credit and/or self-help/set-off remedies.

A longer  term lease generally allows the developer to achieve more favorable financing, translating into a reduction in rental rate.  Reducing the Lender’s and developer’s rollover risk allows the lender to amortize the loan over a longer time period.  In addition, a longer lease term reduces the real estate and property-related risk of the transaction and places greater emphasis on the credit risk of the tenant. However, if a long term lease is structured, the user must ensure the lease meets the operating lease requirements of the FASB 13 (Financial Accounting Standards Board). 

Most users prefer that the lease remain off their balance sheets to improve corporate key financial ratios such as return on assets and return on equity.

The cost of a build-to-suit is influenced by the credit of the tenant and the underlying real estate. Upon lease expiration, the developer must assume the risk of releasing the property.  In the past this could frequently mean an empty building for one to three years, new interior improvements and many other associated fees.  This gamble is minimized if the property is well located and is not constructed as a “special” or “single use” type of structure.

A commonly-encountered issue in a build-to-suit lease is the natural tension between multiple contractors in the same building. Most timetables will require that the tenant improvement contractor is working in the building at the same time as the general contractor is putting the finishing touches on the base building. The practical concern centers around meeting the needs of two contractors simultaneously and balancing their demands for the overall benefit and completion of the project in a timely manner. To address this, many landlords will suggest that the tenant avoid this issue altogether by contracting with the landlord for the construction of the tenant improvements or with its contractor directly.

Most office build-to-suits generally require the user to occupy a minimum of sixty percent or more of the property.  A higher occupancy percentage reduces the risk of leasing the remaining space to additional tenants and thereby allows more favorable financing and investment parameters.  However, in many markets with limited vacancy, a small percentage of unoccupied space allows the developer to maximize his return by charging higher rents on the initial vacant portions of space.


There are various ways a lease can be structured to achieve the needs of the user.  Below are the most common types:

Full Service – A full service lease means that the lease rate includes all operating expenses of the building and requires no additional payment from the tenant. A hybrid of this lease requires the tenant to pay their prorata share of any increases in expenses from the time of occupancy.

Net, Net, Net Lease – A Net, Net, Net lease (triple net or NNN) means the tenant’s rate does not include building expenses.  All prorata operating expenses and taxes for the property  will be paid by the tenant. However, the landlord is responsible for any structural and capital repairs.  The tenant may terminate the lease in the event of a casualty subject, of course, to provisions in the lease.

Bondable Lease – Similar to a NNN lease, but the tenant is responsible for all expenses of the property including capital items.  In addition, the rental rate may be affected by changes in the financial condition of the tenant.  The tenant assumes certain lease responsibilities and signs certain corporate covenants resulting in the lease being regarded by lenders and investors more as a corporate bond than a real estate loan.  The result is a financing cost at or near the corporate bond rate.

Synthetic Lease – This lease is structured as an operating lease for GAAP purposes and a capital lease for tax purposes.  The synthetic lease allows the tenant to finance its occupancy cost at a lower rate and still achieve the benefits of off balance sheet financing due to certain reversion risks at the end of the lease term.  This somewhat controversial structure can be fairly costly to create and has considerable technicalities, but can greatly reduce the rental costs.  It was derived for use in real estate after a proven track record in the equipment leasing area.  One potential risk of using the synthetic lease is that it may be subject to a re-evaluation by the Financial Accounting Standards Board at some point in the future.


In addition to the above, there are many other creative lease structuring methodologies including leveraged, joint venture and equity leases that should be explored by the user and it’s advisor.

As with any successful endeavor, the right project  team needs to be established to ensure the user makes the most informed decision.  Typically the user initially hires a broker/advisor to set direction and orchestrate the necessary team.  The first major task of this advisor will be to select and coordinate the formation of a “steering committee” within the user firm.  This steering committee should include the highest level of leadership available and will need a focal chairperson.  If the project is a headquarter location, the Chief Financial Officer and Director of Administration should be present, with senior representation from the legal and public relations departments.  The committee will need to be small enough to be available on a regular basis and must be empowered by the Chief Executive Officer and Executive Committee to make decisions on behalf of the corporation.  The committee will need to be sufficiently engaged in the selection and understanding process to feel confident in their many choices.

The advisor will then arrange interviews, prepare requests for proposals, negotiate with, and advise in the selection of other necessary team members who will be involved on an as-needed basis.  These other specialties can be either from an outside firm or integrated as part of the advisor’s firm, but will report through the advisor to the head of the steering committee.  The first such specialty will be a strategic planning function, to provide space sizing and growth studies, as well as other views on the impact of alternative workspace utilization.  Technology advances and attitude changes may also warrant studies into the effects of implementing programs such as hoteling, virtual officing, team rooms, and other modern occupancy concepts.  Other necessary “watchdog” team participants members will be a construction advisor and a real estate attorney.  Each of these specialties will be necessary throughout the search, selection and negotiation process of the build-to-suit.

The real estate  advisory and brokerage firm itself must be able to counsel

the corporation on all possible land and building sites available, current market conditions, comparable rental rates and  the financial impact of a build-to-suit as contrasted to other alternatives.  The advisor, must be able to calculate on an after-tax and/or profit & loss basis both the corporate user’s and the developer’s  financial perspectives to assist in negotiation, financing and/or a forward commitment from a lender.  These real estate financial engineering professionals should be capable of convincing investors of the potential gains if the corporation or developer desires to sell the property.

The negotiation and documentation of a build-to-suit transaction will take significant time and planning, being considerably more complex than the negotiation of a typical office lease.  In a build-to-suit lease transaction, provisions relating to transaction structure, rental pricing, project control, construction issues, performance standards, environmental issues, title, non-disturbance and subordination all play a very major role.  Tenant concerns relating to early termination, renewal, expansion and contraction are also frequently found in a build-to-suit lease.  An experienced real estate advisor will assist in ensuring all these items are addressed to the corporate user’s advantage.

A build-to-suit can offer several advantages to a relocating tenant.  First, a build-to-suit allows the tenant to achieve maximum space efficiency since the space is designed specifically for the tenant. Second, new construction allows a developer to incorporate the most cost-effective energy systems in the project resulting in a reduction in operating costs of the property and lower occupancy costs to the tenant.  Third, the tenant will have maximum design input to create a building that will project the desired company image.  Fourth, a build-to-suit project will allow the user space for future expansion.

A build-to-suit is not a short term solution

A user must make a long term commitment  to the property  to acquire financing.  Second, it is not a transaction that can be completed quickly.  The entire process may take several years to complete.  Third, a build-to-suit generally is still considered a more expensive alternative than leasing existing vacant space, particularly if the size required is readily available on the open market. However, the additional cost may be offset by savings in space efficiency, reduction in operating costs, and improved company image.  Fourth, due to the cost and time commitment of a build-to-suit, a tenant must reasonably forecast future expansion needs to ensure the property will meet the company’s long term needs.


Although not unique to build-to-suit leases, the following issues and concepts also warrant particular consideration in this context and should be considered carefully:
  • Commencement vs. Construction Date: Build to suit lease forms often make the distinction between “construction” and “commencement” dates. While the landlord may seek a steadfast commencement date so that the commencement date for the payment of rent is established at the outset, a tenant would be wise to defer any payment of rent until the project has been substantially constructed.
  • Tenant Rights re: Purchase: Given that build-to-suit projects are generally purpose built for the original tenant, such tenant may seek options in its favor to purchase the project at some point during the term of the lease, a right to be first to the table in the event of a proposed sale (a right of first offer), and/or a right to match an offer received by the landlord from a third party for a proposed purchase (a right of first refusal). Establishing these rights in favor of the tenant will typically require that a balance be struck such that the tenant has the benefit of some or all of these options without unduly limiting the landlord’s ability to deal with the project and get the best price in the market. Such provisions must specify how and when the tenant may exercise its right and set out the criteria to be met in order to exercise such an option.
  • Space Mitigation Strategies: Where the project is part of an existing commercial park, the needs of the tenant for expansion flexibility into adjacent buildings and, alternatively, exit and space mitigation strategies (in particular, flexibility in larger buildings to sub-demise and sublet excess space) should be addressed.
  • Warranty Items: Allocation of risk and the responsibilities for the costs of defects or deficiencies covered under warranty or which result due to faulty design, construction or defect should be expressly addressed in the lease, including as part of the landlord’s and tenant’s repair and maintenance obligations and the operating cost recovery provisions.


Build-to-suits represent one of the alternatives available to companies in today’s complex commercial real estate environment

Many executives in charge of procuring space for their companies find the build-to-suit option advantageous, while others prefer more traditional approaches to meeting space needs.  Build-to-suits make the most sense when the company can make a long-term commitment to a property, can handle the initial costs, and when the firm is seeking to maximize efficiency and possible expansion potential.

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